A Sample Case Study of Private Money Lending In Action

There are tons of incredible deals on the market right now but for one reason or another they do not fit the banks mold, thus we have the need for private money lenders and that is also why private money lenders can command higher returns. Let’s say that Tom (real estate investor) finds a bank owned property (REO) that has water damage from a leaky roof, torn up carpet, a dead water heater, missing appliances and a pool that looks more like a pond than anything else. Well, banks aren’t going to lend against this property – yet it is a steal of a deal. Tom sees it listed at $124,000 and he knows that he can get the repairs done for about $17,000, knowing once he is done he will have $141,000 into a property that is worth $200,000 after he fixes it up. Tom also knows after doing his market research on comparable sales of like properties in the area, this deal will go fast so he needs to offer cash and to close very quickly or someone else will snatch it up. Tom approaches you and says I have an incredible deal that will take about $141,000 to get right and it is worth $210,000 after repairs are done. After some quick math ($141,000/$210,000) you determine your max loan-to-value will be about 67% so it meets your 70-75% threshold for maximum LTV. You would then order a quick appraisal and property inspection to determine value and cost to repair. If everything lines up, you would call Tom and tell him you want to press forward with the deal. After some discussion, you agree to lend the money based on the following terms: $141,000 = private money LTV=67% 10% Interest Rate = $1175 per month payments to you Term = 12 months and 1% origination All of the documents are drawn up by your attorney and closing is set. Tom purchases the property, fixes it up and then sells it 6 months after the purchase. So, what did you make? 6 payments of $1175 plus $1410 in origination TOTAL = $8460 or an annualized return of 12% You, as a private money lender, made a very handsome return and the real estate investor was able to still profit as well. Everybody wins.